Stock Market Mayhem? – A Retail Investor Checklist

by Salil Dhawan ·
Published September 24, 2018
· Updated October 12, 2018

Black Friday and Black Monday, Indian version of Lehman Brothers, start of equity market collapse, liquidity crunch, worsening macros, IL & FS fiasco, twitter commandos have taken lot of pride in stating the fact that they had predicted this meltdown two years back and retail-oriented private sector banks, HFC’s and NBFC’s were always overpriced, risky trade etc. There are some very interesting terms or perspectives you as a retail investor will come across in the next few days or weeks across various websites, youtube, twitter, and other social media platforms.

Retail investors who have started their equity investments recently – say a year back are in deep red, make no mistake. What has let to this steep market correction – most of us weren’t aware of or maybe aren’t sure what is happening till date? What looked like a great bull market story in August 2018 has suddenly fizzled out. How has this market correction impacted your portfolio depends on the quality of your portfolio. Is such a correction good or bad for your investments? Should you add more or stay on the sidelines? What better you could have done to contain steep fall?

This write-up doesn’t mean to teach investors how to invest as we can get loads of such material on the internet but just a reminder to our readers that one should never forget the investment basics, irrespective of it being a bull market or a bear market.

As always and recommended, keep your investment strategy simple and consistent and don’t get bothered by short-term blips, especially if your investment horizon is long. Retail investors should cut the noise and concentrate on their goals and corresponding investments. Rather than worrying about indices movement, you should have nothing but quality in your portfolio, of course depending on your risk profile, time horizon.

Below is the checklist if you are following DIY (Do It Yourself) investing:

(a) Have you mapped all your investments in line with your short, medium and long-term goals?

(b) Is your investment portfolio as per risk profile or your portfolio is tilted towards risk assets than what you as an individual can afford?

(c) Have you made sure that you have not over diversified your mutual fund or direct equity portfolio? No cluttering the portfolio?

(d) Have you made sure you have an adequate life cover under a term plan?

(e) Do you have adequate medical insurance cover (apart from that offered by the employer) along with critical illness cover?

(f) Have you invested in good businesses only with strong financials, good and progressive management or you have invested based on someone’s recommendation?

(g) Do you have any of the expensive ULIP policies which some relative sold it to you and now you are procrastinating its closure?

(h) Are you increasing your investments in line with your various goals and salary increase or involved in investing randomly?

Common investing mistakes investors must avoid:

(1) Not following proper asset allocation – Proper asset allocation is one of the very pillars of personal finance which many investors casually tend to ignore. Investors must strictly follow proper asset allocation in line with their goals and risk profile. Not following it can result in big losses in a small amount of time which at times can be difficult to digest for a retail investor. How much an aggressive investor thinks oneself to be, the deep red portfolio doesn’t excite anyone. Different investors react differently to stock market movements, especially on the way down. Always follow proper asset allocation. With equity markets making new highs almost daily a few weeks back, retail investor bi-passed required asset allocation and skewed portfolio allocation aggressively towards equity which has now caught them by surprise.

(2) Invested heavily in mid and small-cap funds only – A few months back, it was a dream run for small, midcap and microcap funds with generating excellent 5-year CAGR return. New first time investors, with all the excitement running up their sleeves, started SIP or did lumpsum purchase in such schemes (ignoring large-cap, diversified multi-cap equity funds). With the benchmark mid and small-cap indices down close to 20-25% times from the peak, retail investors have been stunned outright by the intensity of the fall in the short interval of time. Many investors invested in the scheme looking at the CAGR returns only ignoring risk profile, asset allocation in the process. Going to a financial website and look at best performing funds for last 5, 3, 1 year period and start investing. This is not a great strategy. Investors must review the fund category, kind of market companies it invests in, fund investment mandate, performance during market corrections, fund manager and fund house overall performance, to name a few.

(3) Investing in equity for the short term – In spite of equity being recommended investment vehicle for the long term, investors do tend to get carried away and end up investing in equity markets with 6-9 months. Now with the tremendous fall, redeeming at this point in time will lead to heavy losses. If the time horizon is less than 3 years, stay clear f equity.

(4) Compromising on quality – Compromising on a quality business to invest against low quality can lead to serious consequences. Good quality will always rebound strongly when market sentiment improves but for low quality coming back to all-time highs will be a big challenge. Never ever compromise on quality. Buying quality now in a staggered manner will be a prudent strategy.

(5) Cancelling, pausing or redeeming SIP investments – With electronic and social media abuzz with negativity towards investments, panic can easily grip retail investors. Though retail investors have become the lot more enlightened now, still we must remind ourselves not to tinker with our SIP investments in any way. We can have additional money pouring into our SIP’s via STP route. Continuing these investments will pay you rich dividends in the long run. Make sure you have adequate investments in large-cap and diversified mutual funds besides allocation to mid and small cap schemes as per your risk profile.

(6) Not investing in large-cap and multi cap mutual funds – Many investors looking at relative existing returns of mid and small cap schemes tend to stay away from multi cap and large cap schemes. It all boils down to how much risks you want to take and if you have a stomach to digest heightened volatility? Large-cap and multi-cap schemes have over the years given great returns will relatively less risk. So don’t shy away from them but keep them as core portfolio holding. It will pay rich dividends in the long term.

(7) Getting stuck in thematic and sector funds – Retail investors getting stuck in thematic and sector funds is not a new thing. After a stupendous run in pharma in last few years, pharma had corrected big time giving a hard time to investors in Reliance Pharma and SBI Pharma. The same thing happened to investors in the month of September 2018 with banking and financial sector funds. Investors now are a confused lot what to do now. Such funds are good for investors who can time getting in and out of the sector. Do check how much additional return such funds are generating in comparison to other schemes in your portfolio and kind of risk you are taking to generate that extra returns. If you still want to continue, make it a small part of overall portfolio allocation and keep investing via SIP and ride the complete cycle of pain. Invest only in such funds if you are aware of the risks and volatility associated with such funds.

(8) Showing great keenness to invest in stocks which have fallen drastically – What market has done to some of the stocks in recent market correction, is for everyone to see. Don’t be in a great urgency to buy such stocks. Stay clear of these. They are down for a purpose and let complete clarity emerge. Just because it has fallen, doesn’t warrant a buy. In this market correction, great businesses you can easily distinguish. Stay with leaders and agile businesses willing to change with time, but with good management. If you don’t understand the business, don’t invest in such stocks.

(9) Shying away from taking corrective actions – If you analyze and think you have made mistakes in asset allocation, investing in high-risk instruments etc., don’t shy away from taking corrective actions. Better late than never. Never procrastinate in taking corrective actions.

Market volatility is a key ingredient for the long-term wealth creation. You or I as an investor can’t avoid it. Investors must make sure they are with quality irrespective of nature of the market, investing systematically and keeping a tab on investments and investing as per their financial goals. Investing in random stocks can lead to deep losses. Investors must evaluate their risk profile and invest. Great essence of remaining with quality is realized during market downturns, which is happening at present. Market volatility should not make you tinker with your systematic investment. It must go on till the goals are achieved.

Disclaimer: The write-up is for information purpose only and is not a recommendation of any sort to the readers. Mutual funds are subject to market risks. Please consult your financial advisor before taking any financial decisions